BackMonetary stimulus may backfire, provoke savings glut: Rajan
Rajan says the world is 'setting the stage for a repeat' of the years that followed the Asian financial crisis of the late 1990s
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Washington: Aggressive monetary policy by developed economies may hurt global growth by pushing emerging markets to pile up foreign-exchange reserves instead of spending, Reserve Bank of India governor Raghuram Rajan said.
Rajan, a regular critic of the unprecedented monetary stimulus the world’s richest nations have put in place, said the world is “setting the stage for a repeat" of the years that followed the Asian financial crisis of the late 1990s. At the time, developing economies traumatized by capital outflows and painful bailouts started accumulated reserves as insurance, leaving it to US consumers to buoy global consumption.
“Any emerging market today is going to look at the currency volatility and say ‘whatever money comes in, I’m going to be careful about it, I’m going to be build some reserves,’" Rajan said in a speech in Chicago on Friday. “That kind of policy will depress global demand."
Overseas investors pulled $8 billion from rupee-denominated debt last year, pushing the currency to an all-time low, as the US Federal Reserve signaled it would begin paring its record monetary stimulus. Rajan, who took office a year ago, has overseen a recovery of the currency, raising interest rates three times in his first five months as he also seeks to tame Asia’s fastest inflation.
“We’ve had six or seven years of this and we still have a weak recovery, so you have to ask ‘is this the answer?’" he said of developed economies’ stimulus policies such as record low interest rates and asset purchases.
How much more?
“How much more can you do of this stuff and of course what’s the payback when you’re unwinding?" he said at the event organized by the Chicago Council on Global Affairs.
Indian policy makers have now rebuilt foreign-exchange reserves to near a record high as investors weigh the timing of an interest-rate increase by the Fed. India will probably be less vulnerable to a global shift of funds, Rajan said last month.
“I don’t want to jump up and down," Rajan, a former chief economist at the International Monetary Fund (IMF), said of data released last month that show Indian’s economy grew 5.7% in the three months ending in June. Still, the figure is “reassuring" and should help the country meet a 5.5 forecast for the fiscal year, and “maybe a little better."
Expansion may be in the 6% range next year and in the 7% range after that, he said. BLOOMBERG
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